People often ask me where do they start when they think about investing. Simply put, investing starts with you.
Individual investors have little control and influence over market movements, economic fundamentals or cycles, and unplanned personal financial events such as unemployment or disability. World economies, including SA, move through different economic cycles and the recent world wide recession and increased market volatility with investors suffering significant financial losses before witnessing and equally sharp recovery could not be accurately forecasted or predicted by even the most informed analysts, let alone individual investors. It is difficult to explain a 12 month gain to end of August of almost 7% in equities versus a return of just more than10% from money markets followed by returns of about 29% from the equity market with 9.8% per annum rolling return from cash a mere 2 months later at the end of October.
Instead of worrying too much about market and economic conditions, investors should rather focus on what they do have control over. Start by researching and making the following decisions related to:
- Active vs. passive investing: The decision to select
a. an actively manage portfolio, or
b. a passive index tracking portfolio, or
c. a combination of the above
- The asset allocation mix and amount of risk: This is the decision on firstly the allocation of investment funds among different asset classes (cash, bonds, property, preference shares, equity and offshore instruments) in order to achieve a required targeted return, and secondly the decision to reduce the risk of capital loss (rather than volatility risk) through optimised diversification (geographically, across uncorrelated asset classes, and within the same asset class).
- The entering (investing lump sum amounts vs phasing in) and exiting (disinvesting, switching and rebalancing) of markets or asset classes,
- Manage investment risk in terms of interest rate movements, inflation and investment time horizon, and
- Develop an appropriate and supportive money personality which is aligned with your investment needs.